Copious capital
Many large players in healthcare are flush with capital, which is driving expansion, mergers and acquisitions. Shedding real estate can be attractive to providers that need capital and want to offload maintenance duties as they put more resources into patient care. But cash-rich health systems are not selling their real estate by and large, said Mindy Berman, managing director of capital markets at JLL.
Despite the burden of technology, labor and pharmaceutical costs, providers are increasingly self-developing new facilities with good access to capital and low borrowing rates, especially for highly rated and highperforming health systems, she said.
“Last year was the first year where there were no meaningful monetizations—it goes back to access to capital,” Berman said, adding that she typically sees about two a year.
The continued strengthening of credit continues to drive a lot of merger-and-acquisition activity and construction, CBRE’s Bodnar said.
Many health systems have exercised their right of first refusal, which gives a potentially interested party the right to buy a property before the seller fields any other offers. This is likely an outcome of the low cost of capital, HRE Cap’s Beebe said.
Despite the momentum around medical office space, the silver tsunami of baby boomers is poised to boost demand for hospitals as well. The push for more micro-hospitals featuring smaller footprints and post-acute facilities, as well as local requirements like seismic upgrades required in California, are driving the current $21.4 billion of new hospital construction, according to JLL.
Nearly 38 million square feet of hospital space was under construction in 2018, JLL’s analysis of Revista data shows. That was up from 25.9 million in 2017, 32.5 million in 2016, 27.5 million in 2015 and 21.4 million in 2014.
Since the financial crisis, health systems’ access to capital across the spectrum has virtually been unlimited, said Jeffrey Sahrbeck, a managing director at healthcare financial advisory firm Ponder & Co. This will continue to drive M& A and construction activity, he said.
“Hospitals have been building beds and spending on brick and mortar in advance of baby boomers,” Sahrbeck said. ●